Barriers hold up progress towards single market in financial services

Date: 28/03/1996

By Fiona McHugh

THINGS are not always what they seem, as scores of French men and women learned the hard way last year.

Lured by the promise of cheap mortgages, they flocked to German banks seeking bargains. But despite the lower interest rates advertised, they ended up paying more for their loans than they would have done if they had bought locally.

This was because the deutschemark was stronger than the French franc and, once exchange rates and hidden charges had been taken into account, the price of the German mortgages soared in real terms.

Their experience, which sparked a political storm, came as a stark reminder of the fact that, three years after opening for business, the single market in financial services was still far from up and running - although not for want of effort by the EU's institutions.

All the appropriate laws allowing banks and building societies to sell their services abroad and companies to post shares on other EU markets have been adopted.

So, in theory, consumers should be able to insure cars in the UK for use in Belgium, or take out loans in Italy to buy houses in France. In fact, however, they cannot - or at least not easily.

A combination of factors lie behind the lack of progress.

First, most member states have still not put the relevant EU laws on to their national statute books, an omission which has provoked stern rebukes from Single Market Commissioner Mario Monti and which is likely to land them in court before the end of the year. But even in those countries which have implemented the rules, banks have shied away from selling their services abroad, preferring instead to trade at home.

“It has to be admitted that the single passport (or licence) has not been used as much as we expected it to be,” admits one disappointed EU official.

The European Commission suspects that this is because member states are using national laws to mount barriers to trade in this area. Under the second banking directive, adopted in 1989, host countries may force foreign banks to obey national rules, but only if those rules have been passed to protect the “general good”.

What exactly that principle may be taken to mean has never been spelt out by the Commission. Consequently, member states have been allowed to obstruct foreign banks doing business in their territory by invoking the “general good”.

Belgium, for instance, forbids the sale of variable-rate mortgages of the sort usually offered by UK banks, and insists that early repayment of loans, which is not an option in most EU countries, be written into all contracts issued in its territory on the grounds that it protects home-owners.

In the Netherlands, domestic legislation outlaws door-to-door selling of banking services, even at the potential customer's request, and a bank keen to sell services in France may not do so through an intermediary, but has to open a branch - a costly and complicated move.

All of these obligations add up to a huge deterrent to banks thinking of branching out into new territories. Conscious of the problems encountered by financial institutions, the Commission launched a consultation process aimed at tightening the definition of the “general good” last November. The results are still being processed.

Another major obstacle to a genuine single market in financial services is taxation. Several governments give tax breaks and government subsidies to home-owners, but only if they take out loans with local financial firms.

In Germany, for instance, there are tax reductions on savings, but only if those savings are made with a German bank.

Similarly, government subsidies for house buyers may only be issued through national building societies. As a number of French and British companies have found, the only feasible way of doing business in the Federal Republic is to set up a local firm.

Luxembourg is also guilty of such discrimination. It was taken to the European Court of Justice last year - and lost - for refusing to grant housing subsidies to a Luxembourger who had taken out a loan in neighbouring Belgium.

When it comes to insurance, similar protectionist tactics are rife. Belgium and France, for instance, will only allow foreign insurers to offer the sort of no-claims-bonus insurance schemes which their own companies sell.

Again the Commission has been forced to step in, issuing a warning to both countries that if they continue to block the sale of other brands of insurance they may find themselves in court.

“The Commission considers the imposition by a member state's insurance supervisory authorities of a standardised no-claims-bonus system on all companies offering car insurance on that member state's market to be a restriction of competition and incompatible with the third non-life insurance directive,” Monti has said.

Brussels and Paris argue that their schemes discourage reckless driving and so promote the general good.

But the Commission disagrees, arguing: “It is a moot point whether the prospect of having to pay a higher premium next time round really makes drivers exercise greater care, or whether it does not rather make them think twice before reporting any accidents they may have caused.”

In addition to these regulatory hurdles, most banks point to an in-built resistance among consumers to the idea of buying financial services abroad.

“It is completely different to buying a video or a car. Banks must build up consumers' trust and this can take years to do,” explains one banker, adding: “Germans, for instance, know that their financial institutions are reliable, but they do not know that about foreign ones. Barings Bank is probably the UK bank best known by them.”

When it comes to buying mortgages or taking out loans, purchases which often involve lifelong commitments and complicated contracts, most EU citizens it seems prefer to deal with locals who speak the same language.

“It is a question of habit. They know and trust the people who are close,” says another banker.

The Commission is trying to make it easier for consumers to shop around for bargains by harmonising the way in which banks calculate the cost of loans. It also hopes to establish common consumer protection rules in this area and to ensure that the legal guarantees offered in each country are broadly similar.

But the consumer affairs directorate-general admits that upgrading consumer protection in this area is likely to be a difficult task.

“Look at the cross-border payments directive. It took years to even get out of the Commission and it has been having a rough ride since,” said a senior official.

The advent of the single currency is bound to increase the flow of cross-border trade. In the meantime, however, banks must continue to struggle against the tide if they want to offer their services abroad.